Management of Companies

Principal vs Agent

for reference: Principal-Agent Conflicts

• taking a closer look at Shareholders and Management

Structures

• board of directors is making decisions
  • may also include external contractors or independant directors, typically less knowledgeable than executive directors
• day-to-day business handled by managers
  • top-manager sometimes also part of board of directors
• codetermination
• one tier structure
  • just a board of directors with monitoring by employees
  • popular in US, Switzerland, Japan
• two tier structure
  • board of directors + supervisory board
  • supervisory board monitors the board of directors and managers
  • board of directors and supervisory board may not share members
    • different rules for directors who have retired recently
  • popular in Austria, Germany, Italy
  • supervisory board consists of “voted” people
    • based on jurisdiction votes may be cast from employees, shareholders or both
    • at a certain size and free float there should also be an independent director not affiliated with any major shareholder to represent the minority shareholders

A word on Independence

• easy to declare, hard to proof
• not measurable, internal state of mind
• one can just exclude e.g. family members and hope for the best

Board Structure of Austrian AG

• board of directors … Vorstand
  • members appointed by board of supervision
• board of supervision … Aufsichtsrat (3-20 people)
• works countil … Betriebsrat
  • 1 person for every 2 persons in board of supervision
  • members must be employees, not from a trade union
• both boards consist typically several people

Board Structure of Austrian GmbH

• just directors and members
  • typically fewer people, therefore less complexity needed
• statutes may require board of supervision
  • again 2:1 ratio of employees
  • does not appoint members of board of directors, there is none
• mandatory in 2 cases

  • 50 people && > 70k capital (rare)

  • 300 people average (simpler terms, captures essense)

Board Structure of Societas Europaea

• both one-tier and two-tier model are possible

Management and Third Parties

Representation

• representation is with directors
• forming contracts, buying/selling individual assets etc
• not: selling all assets, merging companies together, etc

Third Party contracts

• if contract is signed prematurely (e.g. without consent of board of supervisors) then the contract is not valid
  • protecting business deals from mistakes
  • does not apply when other party signs contract under this knowledge

Transparency

• who is or isnt director: Business Register
• plurality of directors: forming binding decisions
  • individually (great flexibility, greatest danger)
  • all of them together (less flexibility, least danger)
  • any two/three/etc of them
• default rule: all directors together for contract to be binding
• agency law … representation by employees
  • e.g. signing phone contract, not done by director
• attribution
  • faults of directors (negative action or inaction) can always be attributed to the company
  • a company “knows” something when a director knows of it

Appointment and Removal of Board Members

todo page 63 onwards

Running the Company

• managers cannot restructure company on their own → shareholder approval
  • 3/4 majority
  • increase equity
  • merger / split
• private limited company
  • crucial decisions need to be made with all members
  • status define these decisions
  • contracts made without consent to a 3rd party are still binding
    • consequences are beared by director responsible
  • members can give instructions when a majority is reached
    • members can take initiative
  • position of members is strong
• public limited company
  • no instructions from members → managerial independence
    • buffer against majority shareholders wants
    • most still comply with majority, otherwise ‘no confidence’ in next shareholder meeting
  • shareholders need only be consulted for merger
  • board of supervisors consulted for material changes (closing a plant)
  • board of supervisors can only prohibit things, not take initiative
    • still, since supervisors can remove directors, they are likely to comply when asked
  • contracts made without consent to a 3rd party are still binding
    • consequences are beared by director responsible

Remuneration

• GmbH

  • executive compensation → even if no profits
  • dividends → only if profits

• AG

  • shareholders have “say on pay”, decide on model

• remuneration → tool to align managers

  • instead of extensive monitoring
  • cash payments or stock options programme

• board of supervision

  • typically no performance compensation
  • fixed compensation
  • different alignment to management needed

• different directors, different responsibilities

  • CFO → finance

• board of supervisors

  • decisions in circular resolution (majority vote) or in meeting
  • provided with reports

• committees

  • decisions delegated to board of supervisors
  • accounting auditing

Liability

• compensation
  • incentive to not inflict damage
  • not liable for lack of success
  • only liable for negligent actions (or inactions)
  • liable if violate specific duties
    • duty of loyalty (don’t compete)
    • duty of care (standards for management)
      • hindsight bias by judges → less risky decisions
    • protection via D&O liability insurance
• lawsuit against company
  • AG → board of supervisors
  • GmbH → members
  • shareholders → rarely, not enough knowledge
• damage by company vs damage by 3rd party
• damage to company → damage to shareholders

Internal Decision-Making Process

• public: majority vote, CEO’s vote counts double if inconclusive
• private: all directors need to approve